Banks, small businesses and paying for what you don’t use

Posted by Graeme Codrington on 29th May 2014

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Earlier this week, I received a message from our business bankers in South Africa, informing me that they would be charging us for all credit facilities that we were not using. This baffled me. Then it irritated me. So, I decided to do something about. I started with social media, which was picked up by radio and print journalists, and has ultimately led to the Head of Commercial Banking at the bank contacting me directly. The story is still playing out, but this morning I was featured on the main page of BizNews, published by Alec Hogg. They could only put an edited version of my actual contribution on their site, so here is the full thing – including the advice I gave the banks.

Standard Bank’s current advertising campaign asks: “When last did you feel this excited about banking?” The honest answer is: before I became a small business owner. But actually, honestly: probably never. Certainly not when they treat business people like they have this week. Maybe their advert is directed at their shareholders, and not their customers.

On Tuesday, as business people around South Africa had to deal with the news that the economy had contracted by 0.6% in the first quarter of this year, those that have business banking facilities with Standard Bank also received an sms informing them that the bank would now be charging “a fee of 1.2% on all unutilised overdraft facilities”. No further information was given, except to phone the business banking call centre if one had queries.

Those customers who did phone encountered bemused and clueless call centre operators who took a few minutes even to confirm the information with their supervisors. Apparently, no-one in the business banking decision making department had thought to tell anyone else in the business banking division about this interesting new approach to charging customers for services they did not need to use.

Standard Bank then started pointing their clients to a website (http://bit.ly/1kbUFfs is the actual link they’ve been sending out) which explains that due to “the new Basel rules, banks are required to raise the quality and quantity of the regulatory capital base.”

This much is true, although the particular requirements referred to only start in 2018. Even though South African banks were largely innocent in the highly risky approach to lending and financing that led to the global financial crisis in 2008 and the current recession we’re living through, they nevertheless must comply fully with the requirements of international banking regulations known as Basel accords. And this now includes Basel III, which requires them to keep a lot more money in easily accessible and non-risky assets, in order to ensure they have funds available if their customers should use their loan and overdraft facilities.

It was recently certified that all major South Africa banks have already complied with all of the capital requirement levels in the Basel accords, even though the first of them will only start to be phased in from next year. This is good news for our banks and our country. But it does leave one wondering why Standard Bank felt the need to now start charging people for facilities they don’t use.

The truth lies further down Standard Bank’s press release: “As a bank, we are obliged to hold capital against the overdraft facility, regardless of whether it is used or not. Unlike most other financial institutions, Standard Bank have not previously charged a fee to offset the cost of holding this capital, but the new regulatory environment has necessitated the introduction of this fee.”

There’s good, bad and ugly in that paragraph. It is true that Standard Bank need to hold capital funds for all approved facilities. It’s less true that other South African banks have charged a fee for this. In fact, most do not. FNB were quick to let people know today that they have not and will not do so. And most importantly, it’s not true at all that it is the new regulatory environment that has necessitated the introduction of the fee. Standard Bank have worded this in such a way as to make it seem that they had no choice but to do this. That is just not true.

It’s important to note that Standard Bank, like all other banks, charges both an overdraft usage fee as well as interest the moment a business uses its loan facilities. This is not about the entirely correct notion that using a service should incur a cost. That happens already. Nor is this about insurance in case you cannot repay your loan. They have both insurance and sureties in place for almost all business loans.

The fee they want to charge is really because of the likelihood that they will lose income when they begin to purchase “better quality” capital liquidity assets. In simple terms, they’re going to need to sell some of their more risky assets and buy some less risky ones, and also ensure they’re in investments with shorter terms. These “higher quality” assets don’t yield as much return as the assets they are holding now. Admittedly, these higher quality assets can be hard to come by in South Africa, but the real “cost” to Standard Bank is that the assets they will own will generate less revenue for them (because they are less risky).

Therefore, the real reason they need to start charging businesses a fee for facilities they’re not using is that banks and their shareholders have become used to eye-wateringly high profits and revenues, quite a lot of which are paid out in sky-high salaries and bonuses. If they really were using the money to create a capital adequacy fund, it would be entirely reasonable to presume that they would be prepared to refund businesses those fees if the business cancelled their overdraft facility or moved their account elsewhere. But that’s not likely to happen, is it?

It is disingenuous for banks to hide behind little-understood international regulations to introduce new costs to customers without adding any benefits at all. It’s too easy for banks to blame regulators, when what they’re mainly trying to do is profiteer. It’s even harder to swallow this when the South African economy is in the state it is in, and what we need now more than ever is growing businesses and developing entrepreneurs. One wonders as to the timing of this announcement, coming when the government and its ministers are in flux and transition, and not quite keeping a close eye on what’s happening in the markets.

But actually, most entrepreneurs and small business owners already have a long list of complaints about their banks.

So, what’s to be done?

If banks want to avoid a charge of profiteering under the guise of complying with Basel III, they need to pass on not only the costs of compliance with these international accords, but also the benefits. If Standard Bank was concerned about its business clients, it might think of the following:

Provide an easy mechanism for businesses to apply for overdraft facilities only when they need them, rather than having them just in case they’re needed. This might involve some form of pre-approval process with a fast track approach when the actual application is made. This seems like a laughable suggestion to any business person who has tried to open a line of credit with a bank – the process is both slow and arduous. Banks could easily find ways to streamline this process, thus providing a really helpful service to their business customers. One can live in hope.

Wait as long as they can before passing on any charges. The higher capital requirements only start being phased in next year, and are only mandatory requirements from 2019.

Find ways to reward their clients that help the bank to reduce their overall risk. An easy win here would be to offset the fees they envisage charging on unused loan facilities by credits for certain levels of deposits or fixed term deposits. This gives the bank more liquidity anyway.

Develop new products that provide the services and facilities that businesses need while keeping within the risk criteria the regulators want. For example, Citi recently announced a 31-day-notice account for businesses. This neatly exceeds the 30-day stress test margins imposed by Basel III. It’s a mindset that few entrepreneurs and small business owners ever see from banks: genuinely putting their customers’ needs first.

Provide actual business advice and services to their clients. For example, under the rules of Basel III, banks can significantly reduce the amount of capital they are required to hold by strengthening the “operational relationship” between the bank and a business customer. During stress tests, this will reduce the amount of the loans that are required to be covered from 75% to 25%. This was to encourage banks to be a lot more involved in the businesses of their clients, and return to “traditional banking activities” according to Basel III.

Along these lines, both deposits and overdrafts that are related to business operations (including payroll, creditor and debtor payments, fixed costs) are considered a lot less risky by Basel III. Banks can reduce their capital requirements by gaining an understanding of their clients’ businesses and the ways in which they use cash and bank facilities. A simple calculation of the ratio between average balances and operating cash flows will give a good idea of how much of the activity is “operating” and “non-operating”. In this way, Basel III wants to push banks to get more involved in understanding the businesses they supposedly serve, and also understanding – and mitigating – business risks. Admittedly, it’s a lot easier to just charge a fee for facilities you don’t use.

Standard Bank could explain how they came to the amount of 1.2% annual charge on unutilized overdrafts (unless you use at least 80% of your facility). In his annual letter to shareholders a few weeks ago, Jamie Dimon, CEO of JPMorgan warned that the cost of committed but unused credit revolvers could increase as much as 60 basis points as a result of new regulations. Is it just me, or does Standard Bank’s 1.2% fee look suspiciously like double what one of the world’s most risk-taking banks suspects will be the impact? I’m sure that’s too simplistic a view, but it did strike me as odd.

At very least, Standard Bank might have taken a different approach to this announcement. A simple email explaining the capital adequacy provisions with a request for all business owners to review their facilities and reduce them if they were unnecessary would have elicited a very different response from their clients, and would have been a much better starting point. They probably do have to charge something for the facilities they make available, even if they’re not used, but the timing, the approach and the level of cost imposed on the customer just feel wrong.

It does not fill one with confidence in one’s bank when the call centre you’re asked to contact for more information is even more clueless than you are. Is it arrogance or incompetence, or both, that the bank did not think its small business owners would enquire about this change in their terms and conditions?

For businesses, the action steps are obvious:

Review your overdraft facilities and reduce them to the levels you absolutely need.

Look for alternative methods of funding cash flow requirements.

Move your business to another bank, or at least threaten to do so. Like most banking facilities, it is likely that if you’re a good customer this additional fee might be negotiable.

Buy more banking shares. It looks as if they’re going to continue their glorious tradition of making money no matter what happens to their customers or the economy.

Graeme Codrington is a board advisor, author and speaker on disruptive change and the new world of work. He is co-founder of strategic insights firm, TomorrowToday.